Natural Gas Services Group, Inc. (NGS) announced its fourth-quarter earnings and revenue on April 1. It comfortably surpassed the consensus earnings and revenue estimates. In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock now.

During the fourth quarter, NGS demonstrated strong financial performance. Its EPS was 116.7% above the consensus estimate, and its revenue beat analyst estimates by 19.5%. Similarly, its fiscal 2023 EPS and revenue surpassed Wall Street’s estimates by 22.6% and 5.2%, respectively. The company reported record revenue and EBITDA in 2023.

For fiscal 2024, the company has guided adjusted EBITDA between $58 million and $65 million. Its capital expenditures for new units are expected to be between $40 million and $50 million, of which approximately $15 million will be used to build new units from the 2023 plan, which is expected to be completed and installed this year.

The company also expects to generate a Return on Invested Capital of at least 20%. NGS’ stock has gained 130% over the past nine months and 120.9% over the past year to close the last trading session at $22.77.

Here’s what could influence NGS’ performance in the upcoming months:

Robust Financials

NGS’ revenue for the fiscal fourth quarter ended December 31, 2023, increased 60.8% year-over-year to $36.22 million. Its adjusted gross margin rose 88.9% over the prior-year quarter to $20.26 million. The company’s net income came in at $1.70 million, compared to a net loss of $756 thousand in the prior-year quarter. Also, its adjusted EBITDA increased 110.1% year-over-year to $16.29 million.

For the fiscal year ended December 31, 2023, NGS’ total revenue rose 42.8% year-over-year to $121.17 million. Its operating income increased significantly year-over-year to $10.46 million. The company’s net income stood at $4.75 million, compared to a net loss of $569 thousand in the year-ago period. Also, its EPS came in at $0.38, compared to a loss per share of $0.05 in the prior-year quarter.

Favorable Analyst Estimates

Analysts expect NGS’ EPS and revenue for fiscal 2024 to increase 121.1% and 18% year-over-year to $0.84 and $143.03 million, respectively. Its EPS and revenue for fiscal 2025 are expected to increase 40.5% and 9.8% year-over-year to $1.18 and $157.09 million, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, NGS’ 22.77x is 97% higher than the 11.56x industry average. Its 3.10x forward EV/Sales is 48% higher than the 2.09x industry average. Likewise, its 7.18x forward EV/EBITDA is 21.4% higher than the 5.91x industry average.

Weak Profitability

In terms of the trailing-12-month EBITDA margin, NGS’ 31.60% is 13.4% lower than the 36.50% industry average. Likewise, its 0.30x trailing-12-month asset turnover ratio is 42.1% lower than the industry average of 0.52x. Furthermore, its 2.04% trailing-12-month Return on Common Equity is 88.4% lower than the industry average of 17.61%.

POWR Ratings Reflect Uncertainty

NGS has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NGS has a C grade for Stability, consistent with its 1.14 beta.

It has an A grade for Sentiment, in sync with its favorable analyst estimates. NGS’ stretched valuation justifies its D grade for Value.

It has an F grade for Quality, consistent with its weak profitability.

NGS is ranked #43 out of 50 stocks in the Energy – Services industry. Click here to access NGS’ Growth and Momentum ratings.

Bottom Line

After ending fiscal 2023 on a solid note, NGS is confident of generating higher earnings from its existing assets and expanding the size of its fleet. This year’s interest rate cuts are expected to benefit the company, as lower rates could boost demand for commodities, especially crude oil.

However, the company could face challenges due to slowing economic activity, which could lead to a slowdown in demand and impact oil production. Moreover, the natural gas markets continue to struggle due to weaker prices and demand.

Given its mixed stability, it could be wise to wait for a better entry point in the stock.

How Does Natural Gas Services Group, Inc. (NGS) Stack Up Against Its Peers?

NGS has an overall POWR Rating of C, equating to a Neutral rating. You may check out these A and B-rated stocks within the Energy – Services industry: Vibra Energia S.A. (PETRY), Trican Well Service Ltd. (TOLWF), and Technip Energies N.V. (THNPY). For exploring more Buy-rated Energy – Services stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

NGS shares were unchanged in premarket trading Wednesday. Year-to-date, NGS has gained 41.60%, versus a 9.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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